News

Santa Clara County sues Milpitas over transfer of properties

By Ian Bauer, Milpitas Post

Posted:
03/28/2013 11:45:47 AM PDT

Updated:
03/28/2013 11:45:47 AM PDT

County of Santa Clara has filed a lawsuit against City of Milpitas claiming it illegally transferred nearly $150 million of its former redevelopment agency's assets to a new entity and kept tens of millions of dollars more in violation of state law.

Filed in Sacramento County Superior Court on March 12, the county's suit against the city and the Milpitas Economic Development Corp. follows Gov. Jerry Brown's 2011 dissolution of redevelopment agencies statewide via Assembly Bill X1 26, which redirected millions of dollars away from former redevelopment agencies originally meant to cure blighted communities and create affordable housing to instead go toward core government services such as police and fire protection and schools.

The state's actions led to the crafting of Assembly Bill 1484, legislation authorizing California Department of Finance "claw-back" city sales and property taxes to satisfy state funding demands imposed on legally separate redevelopment successor agencies entities charged with handling any outstanding debts and winding down the activities of former redevelopment agencies, including one in Milpitas, under the direction of a seven-member oversight board.

The county's lawsuit cites state documents indicating in 2011 City of Milpitas created the Milpitas Economic Development Corp., or EDC, formed as a California nonprofit organization for charitable purposes, and transferred $50 million cash to that entity. The city's action, according to the suit, also approved an operating agreement whereby the transferred cash would be used for "redevelopment purposes" and that the city would provide the personnel and services necessary to implement those services.

Advertisement

During the same time period, the suit claims the city also conveyed almost $97 million in former redevelopment agency capital assets and properties back to the city's control. The city did not transfer more than $87.6 million to the new successor agency, the suit claims.

The county's suit further asserts Milpitas City Council in early 2011 approved the expenditure of $1.5 million in redevelopment agency monies previously transferred to the EDC to pay for audio visual equipment and replacement upgrades at Milpitas City Hall, much of which has been installed. The lawsuit argues Milpitas officials rushed to improperly spend those redevelopment monies to benefit city hall and prevent them from being taken under the state's budget process.

The county's lawsuit requests a laundry list of actions be taken by the court that includes finding any asset transfers from Milpitas' former redevelopment agency to the EDC be deemed unlawful; declare the EDC is in fact the same as the city and is a public agency and not a nonprofit organization; award damages and restitution as well as court costs and attorneys' fees to the county; and reverse all actions taken by the city and EDC to fully reimburse the city's redevelopment successor agency; and transfer all unencumbered cash, once received by the EDC and city, to the county auditor-controller for disbursement to taxing entities.Ã

In essence, the county's suit rests on State of California Controller John Chiang's order in March 2011 that mandated a return of all assets transferred from redevelopment and into a city or public agency after Jan. 1, 2011.

"If a city, county, or other public agency, directly or indirectly, received any ineligible assets from a RDA after Jan. 1, 2011, it will be ordered to immediately reverse the transfer and return the applicable assets to the successor agency of the relevant RDA," Chiang wrote.

The state controller added this order applied in all situations except if the city "has previously contractually committed to a third party for the expenditures or encumbrance of a specific asset," which must have been in place prior to June 29, 2011. The order covered all transferred assets, including and not limited to real and personal property, cash funds, accounts receivable, deeds of trust and mortgages.

In August, after months of conducting an audit on City of Milpitas, Chiang declared Milpitas had transferred $175.6 million in assets between Jan. 1, 2011, and Jan. 31, 2012. In total, the state audit showed $234.7 million in redevelopment assets were owed by Milpitas to the successor agency.

In response to the order, the suit claims City of Milpitas contended those redevelopment assets should not be conveyed as they were public works assets and that the State of California revise its findings.

County officials are echoing Chiang's assertions regarding Milpitas.

"We agree with the state controller that the City of Milpitas illegally transferred property," Santa Clara County Counsel Orry Korb said Friday. "As far as we're concerned this is rogue behavior by the city; they flouted the law just because they didn't feel like doing it."

The suit mainly involves three plaintiffs: the county's Auditor-Controller's Office, the county government and its Office of Education the latter two deemed affected taxing entities seeking those monies.

"We have brought the action because we as the county are a taxing entity," Korb said.

In response, Milpitas City Attorney Mike Ogaz said the county's suit was premature and unnecessary.

"In that it assumes the State of California has ordered return of certain money possessed by the former Milpitas Redevelopment Agency. This is not correct," Ogaz said. "The state Department of Finance has not issued such an order, nor has the meet and confer process taken place,Ãwhich the law requires before such an order is issued."

Ogaz added the county's lawsuit assumes ABX1 26 and AB 1484 legislation seeking to retroactively invalidate transactions entered into before either of those pieces of legislation were enacted, is valid.

"The legislation attempts to Ã"claw-back' those transactions so that the county can take back more money that was held by the Milpitas Redevelopment Agency," Ogaz said. "This legislation, as you recall, wasÃan attempt by the state to solve its own budget problems due to its fiscal mismanagement by taking money legally heldÃfrom local redevelopment agencies."

If the city does lose the lawsuit, Ogaz confirmed what's at stake for Milpitas. It will have to return "certain monies, cash on hand and perhaps liquidate real property."

"It will not affect the budget process for the coming year or for the current year as this has been accounted for," Ogaz added. "Unfortunately, the money and property was planned to be used for local Milpitas betterment projects including affordable housing and new public parks and if we are made to return it, (it) will instead be spread throughout the county and state andÃwill no longer inure to the benefit of Milpitas."

Projects City of Milpitas aims to complete with those targeted "claw-back" monies include a school site for Milpitas Unified School District to be added in the new Transit Area near the Great Mall.

"The school project is proposed on property the state and county claim is subject to liquidation and sale. Obviously, the school will not be built if we have to sell the property," Ogaz said.

Oakland law firm Goldfarb & Lipman LLP paid $50,000 last year to work on former redevelopment agency matters on behalf of Milpitas will defend the city against the county's lawsuit.

The county's court action against Milpitas is similar to a lawsuit the county filed in early March demanding City of SantaÃClara give to the county and local taxing entities nearly $320 million in property, cash and other assets that city allegedly withdrew from its former redevelopment agency in 2011.

&lt;b&gt;Oversight board&lt;/b&gt;

The county's lawsuit against Milpitas comes about year after meetings have been held at city hall by the Milpitas Oversight Board of the Successor Agency.

Holding its first meeting in March 2012, the oversight board and its actions established to oversee the select activities of the dissolution of the Milpitas' RDA and provide direction to the city's successor agency are subject to review by the California Department of Finance.

The board involves alternate members such as city staffers as well as Milpitas Unified School District employees, including Phuong Le, the district's assistant superintendent of business services.

As of its last meeting on Feb. 28, the oversight board was comprised of board Chair Mike Mendizabal (representing the San Jose/Evergreen Community College District); vice chair Marsha Grilli (representing Milpitas Unified School District); Councilmember Armando Gomez (representing the city); and Emma Karlen, the city's finance department director (representing the city).

The board is also comprised of many County of Santa Clara employees. They are Bruce Knopf, director of Santa Clara County Asset and Development, a division of the county executive office; Michael Murdter, director of Santa Clara County Roads and Airports Department; Toby Wong, commander at the Elmwood Correctional Facility; and Glen Williams, an asset development manager with the office of the county executive and an alternate member to the board.

The meetings have been regularly attended by county legal staff and lead administrators including James Williams, a deputy to Santa Clara County Executive Jeffrey Smith, the county's top administrator.

So far, according to oversight board meeting minutes for the past year, no significant actions regarding former redevelopment assets have occurred as meetings have largely dealt with the oversight board's own budget, among other issues.

According to minutes and those who have attended the meetings, bickering between the board and city staffers have occurred at several meetings. At a meeting last October for example, boardmember Knopf, a county director, questioned city staff on the $1.5 million in upgrades to Milpitas City Hall's audio visual equipment and whether that project was completed.

In response, Milpitas City Manager Tom Williams said the EDC was separate from the oversight board's authority and that the board did not have authority over EDC contracts or actions.

Still, at the board's following meeting in November, board members Knopf and Murdter successfully voted on a resolution to formally conduct a public records request on the EDC and related or supporting documents from the city and the city's successor agency.

Although the resolution was approved, the dissenting vote was cast by city finance director Karlen who, according to meeting minutes, stated this request for information on the EDC in her view "would be a waste of city resources, researching and providing readily available public records."

The oversight board's next meeting is scheduled to take place at 4 p.m. Monday, May 13 inside city hall's first-floor committee room, 455 E. Calaveras Blvd.